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Thursday, September 09, 2004

Sudden drop in Treasury auction demand

A Treasury auction of US government bonds on Thursday attracted almost no private demand, creating confusion in the bond markets following a sale on Wednesday that had pulled in unprecedented private appetite.

Bond prices fell in the market after the Treasury revealed on Thursday that indirect bidders, who include foreign central banks and other official institutions, took only 2.9 per cent of the bonds on offer compared with an average of about 32 per cent at the previous 10 auctions.

The sale, of $9bn in 10-year paper, was largely bought up by primary dealers - banks who are licensed to deal directly with the Federal Reserve and in return have to underwrite the auction. Usually primary dealers buy about one-third for their own account but the lack of appetite on Thursday meant they took 96 per cent. The bonds on offer were a regular re-opening, or repeat, of bonds offered last month.